Home Loans. Housing review Fourth quarter 2014

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1 Home Loans Contents Economic overview 2 Household sector overview 2 Property sector overview House prices Building costs Land values 7 Affordability of housing 7 Outlook 7 Graphs 9 Statistics 11 Compiled by Jacques du Toit Property Analyst Absa Home Loans Mooi Street Johannesburg 21 PO Box 773 Johannesburg 2 South Africa Tel +27 () jacques@absa.co.za The information in this publication is derived from sources which are regarded as accurate and reliable, is of a general nature only, does not constitute advice and may not be applicable to all circumstances. Detailed advice should be obtained in individual cases. No responsibility for any error, omission or loss sustained by any person acting or refraining from acting as a result of this publication is accepted by Absa Bank Limited and/or the authors of the material. Completion date: 29 October 21 Housing review Fourth quarter 21 A recession was technically averted in South Africa, but the economy remained under pressure in the first half of 21. Annualised growth of, was recorded in the second quarter of the year, after a contraction of, in the first quarter. On a year-on-year basis, growth in the country s real gross domestic product (GDP) slowed down further to 1,1 in the second quarter, from 1, in the first quarter and 2,1 in the fourth quarter of last year. Real GDP growth of 1, and 2,7 is forecast for 21 and 21 respectively. Headline consumer price inflation remained under upward pressure, averaging above year-on-year in the first nine months of 21 and expected to subside in 21. The main risks to the inflation outlook are the rand exchange rate, food prices, wage hikes, transport costs and property running costs. Domestic interest rates are forecast to rise through 21, based on global and local economic trends and prospects, and inflationary pressures. Financial strain experienced by the household sector continued unabatedly during the course of 21. The declining trend in growth in real household disposable income and consumption expenditure continued up to the second quarter of the year. The net household savings ratio remains in negative territory, while an increasing number of credit-active consumers had impaired credit records at mid-year. Consumer confidence remained low in the first three quarters of 21. The third quarter of 21 saw nominal year-on-year house price growth in the middle segment of the market being marginally higher compared with the second quarter. In the category of affordable housing nominal price growth accelerated further in the third quarter, with price growth in the luxury segment in double digits. Real house price growth was affected by rising inflation. House prices are continued to be driven by property market conditions, which were affected by a combination of macroeconomic developments, the state of household finances and the level of consumer confidence. Against the background of trends in and prospects for the economy and household finances, as well as house price growth in the first three quarters of the year, single-digit nominal price growth is set to continue in the remainder of 21 and in 21. Real house price growth will be the result of nominal price trends and inflation, with some real price inflation projected for this year and next year. Absa Bank Ltd Reg No 19/79/ Authorised Financial Services Provider Registered Credit Provider Reg No NCRCP7 Company Information: absa.co.za

2 Economic overview The global economy On the back of an uneven global economic recovery, world growth slowed down in the first half of 21 compared with the second half of 213. The International Monetary Fund s (IMF) latest assessment of global economic conditions, published in the October 21 edition of the World Economic Outlook, indicates that growth in real world output was down to an annualised rate of 2,7 in the first half of the year from 3,9 in the last six months of 213. The pace of economic recovery has picked up in some advanced economies such as the UK and the US in the second quarter of the year, but indications emerged during the third quarter and early in the fourth quarter that the recovery in the US economy might be slower than anticipated, set to impact monetary policy in the near term while the tapering of quantitative easing continues. The Eurozone, however, continued to struggle into the fourth quarter of the year, despite some far-reaching measures announced by the European Central Bank in an attempt to revive economic activity and prevent the region from falling into a state of deflation. The prospect of another recession in the Eurozone is gaining momentum, with the German economy that contracted in the second quarter and indications of a further contraction in the third and fourth quarters. Other key Eurozone economies such as France and Italy remain relatively weak, adding to the economic woes of the region. Against the background of economic trends in advanced economies, emerging market and developing economies are growing at a steady pace, with stimulatory measures imposed in China after lower levels of activity were recorded in the first quarter of the year. These measures contributed to faster growth in the Chinese economy in the second quarter. The Russian economy has slowed down on the back of tension with Ukraine and resultant economic sanctions by some prominent Western countries, while growth in Latin America has also tapered off, especially in Brazil where investment remains low and economic activity has contracted in the first half of the year. In sub- Saharan Africa economic growth remains resilient and robust against the contrast of favourable external financial conditions and continued domestic macroeconomic imbalances, which impact exchange rates and inflation, whereas the Ebola outbreak is having a severe negative effect on the economies of and health and living conditions in Guinea, Liberia and Sierra Leone. Inflation in advanced economies remained below central bank targets in the first half of 21, while in emerging markets and developing economies inflation was largely stable. Against this background and in an attempt to support economic activity, monetary policy conditions remained very accommodative in advanced economies during this period, while remaining mostly unchanged in emerging and developing countries. The South African economy Although a recession was technically averted in South Africa, the economy remained under pressure in the first half of 21, with annualised growth in the country s real gross domestic product (GDP) of, recorded in the second quarter of the year, after a contraction of, in the first quarter. On a year-on-year basis, growth in the country s real gross domestic product slowed down further to 1,1 in the second quarter, from 1, in the first quarter and 2,1 in the fourth quarter of last year. The dismal growth performance in the first half of the year came on the back of contractions in both manufacturing and mining production. Output in the mining sector was severely affected by the protracted five-month long labour strike in the platinum sector since late January. This had the result of mining production contracting at a real annualised rate of 2,7 and 9, in the first and second quarters respectively, with mining output that dropped markedly further in July and August. Manufacturing production was down by a real 2,7 in the first quarter, while declining further by,9 in the second quarter. The labour strike in the steel and engineering sector for most of July will have contributed to lower manufacturing output in the third quarter, although the level of production rebounded somewhat in August from July. Real growth in the teriary sector was stable at 1, in both the first and second quarters of the year. Lower growth in value added by the financial services sector during this period was countered by an improvement in output in the transport and general government sectors. Headline consumer price inflation remained on an upward trend, averaging above the level of year-on-year (y/y) in the first nine months of the year, after bottoming at,3 y/y in November last year. The major factors which caused inflation to move above the upper inflation target limit of are food prices, transport costs, property running costs, a weak exchange rate and wage hikes. Growth in wages remained above inflation, while labour productivity growth was still low at 1,2 y/y in the early stages of the year, in line with growth in productivity of 1,3 per annum in Underlying core inflation, i.e. headline inflation excluding the more volatile components of food, nonalcoholic beverages, petrol and energy, continued to edge higher to a level of almost y/y recently. Lending rates remained unchanged up to October since July this year when a hike of 2 basis points was announced in the key monetary policy interest rate the repo rate by the Reserve Bank s Monetary Policy Committee (MPC). The repo rate (the interest rate at which commercial banks borrow money from the Reserve Bank) is currently at,7 per annum, with commercial banks prime lending and variable mortgage interest base rates for extending credit to the public at a level of 9,2 per annum. However, the Reserve Bank continues to remain concerned about movements in the rand exchange rate, which depreciated to well above the level of R11 against the US dollar recently, and the possible effect of this on inflation. These developments may hold implications for monetary policy, and thus interest rates, over the short to medium term. Household sector overview Financial strain experienced by the household sector continued unabated during the course of 21. The declining trend in growth in real household disposable Home Loans 2

3 income and consumption expenditure, which commenced as far back as late 2, continued up to the second quarter of the year. Consumer price inflation is on average above, negatively affecting consumers purchasing power, while interest rates were hiked on two occasions as a result of inflationary pressures expected to persist. The net household savings ratio remains in negative territory, while an increasing number of credit-active consumers had impaired credit records at mid-year. Consumer confidence remained low in the first three quarters of 21, negatively affecting the demand for goods and services and credit. Growth in real household disposable income, i.e. after-tax, inflation-adjusted income, remains on a downward trend, reaching an annualised rate of 1,3 in the second quarter of 21 (1,7 in the first quarter). This was the lowest growth in real disposable income in the past ½ years and was the result of the combined effect of continued low employment growth and rising inflation. According to Andrew Levy Employment Publications, the nominal wage settlement rate was in the first half of 21, which was above the average headline consumer price inflation rate of,2 y/y over this period. Growth in real household consumption expenditure slowed down to an annualised rate of 1, in the second quarter of 21 from 1, in the first quarter, which was the lowest level of growth since the third quarter of 29. The lower consumption growth came against the background of continued inflationary pressures eroding consumers spending power, lower real disposable income growth, consumer indebtedness, deteriorating credit-risk profiles and a low level of consumer confidence. The close correlation between growth in real household disposable income and growth in consumption expenditure continued up to the second quarter of 21 and remains related to the severe lack of household savings, as well as many consumers financial inability to access credit for the purpose of spending. This is an indication that households have become increasingly reliant on just income to fund consumption. The gross household savings-to-gdp ratio remained unchanged at a relatively low level of 1, in the second quarter of 21. The ratio of net household savings to disposable income was at a level of -,1 in the second quarter, unchanged from the first quarter. The net household savings ratio is in negative territory since 2. Net household savings is calculated from gross savings, adjusted for depreciation write-offs on the value of physical assets held by households, such as residential buildings and vehicles. The value of outstanding household credit balances, comprising instalment sales credit, leasing finance, mortgage loans, credit card debt, overdrafts and general loans and advances (mainly personal and micro loans), showed growth of less than y/y recently. Growth in the value of outstanding household secured credit balances (instalment sales credit, leasing finance and mortgage loans) dropped to 3, y/y at the end of August, largely driven by low growth of just above 2 y/y in household mortgage balances, which account for more than 77 of total household secured credit balances. Growth in the value of outstanding household unsecured credit balances (credit card debt, overdrafts and general loans and advances) dropped to, y/y recently from a peak of 31, y/y at end-november 2. The sharp downward trend in growth in unsecured credit balances was largely driven by significantly lower growth in the component of general loans and advances (1 of household unsecured credit balances and mainly consisting of personal loans and microfinance) to below 2 y/y in recent months from a high of 3, y/y at the end of September 2. Factors such as the National Credit Act (NCA), banks risk appetite and lending criteria, consumers credit-risk profiles and consumer confidence affected the availability and accessibility of and demand for credit, which resulted in extremely low growth in various components of household credit. The ratio of household debt to disposable income declined further to 73, in the second quarter of 21 from 7, in the first quarter. This was the lowest debt-to-income ratio since mid-2 and was the net result of nominal household disposable income growing by 2,3 quarteron-quarter (q/q), while household debt increased by 1,1 q/q in the second quarter of the year. The debt ratio is calculated as the total amount of outstanding household debt expressed as a percentage of the total annual disposable income of households, i.e. after deductions for tax, social contributions and transfers. The household debt service-cost ratio was unchanged at 7,9 in the second quarter of 21 from the first quarter. This ratio is the interest component of debt repayments expressed as a percentage of disposable income and took account of a debt-to-income ratio of 73, in the second quarter and the average lending rate paid on debt during this period. Based on the abovementioned debt-to-income and debt service-cost ratios, the average interest rate charged in the second quarter of 21 to service household debt was around,7 per annum, which was 1,7 percentage points above the ruling average prime interest rate of 9 per annum over this period. Due to trends in consumer finances, credit-risk profiles and banks risk appetite and lending criteria, consumers paid on average a premium on debt of almost 1, percentage points above the average ruling prime lending rate between the first quarter of 29 and the second quarter of 21. Statistics on consumer credit-risk profiles since the first quarter of the year reflect changes to credit regulations announced late last year to make provision for a credit amnesty process, which came into effect on 1 April 21. The shift in the data since the first quarter occurred as a result of credit bureaus implementing the changed regulations from this quarter. The credit amnesty process involves the continuous removal of adverse consumer credit information kept by credit bureaus, specifically with regard to consumers who have repaid their debt. The amnesty, however, does not relieve consumers from the obligation to repay outstanding debt. Despite the credit amnesty process, consumer creditrisk profiles deteriorated somewhat further in the second quarter of 21, with a total of 9,9 million credit-active consumers, or of a total of 22, million, having Home Loans 3

4 impaired credit records, compared with 9, million (,2) in the first quarter. The number of consumers in good standing came to,17 million () in the second quarter. A total number of 79,2 million consumer credit accounts were active in the second quarter of the year, of which,1 million (73,2) were in good standing and 21,2 million (2,) were impaired. Consumers creditrisk profiles impact their access to credit, as reflected by banks risk appetite and lending criteria, which eventually affect household consumption expenditure against the background of a continued low level of savings. Based on the latest Quarterly Labour Force Survey published by Statistics South Africa, a total of 1,9 million people were employed in the formal and informal sectors of the economy in the second quarter of 21. Against the background of major labour market instability since early this year, which lasted into the third quarter, only,3 more people were employed in the second quarter of the year compared with the first quarter. The unemployment rate increased to 2, in the second quarter from 2,2 in the first quarter of the year, which implies that a total of,1 million people were unemployed by the second quarter, up from,7 million in the preceding quarter. According to Andrew Levy Employment Publications, a total number of 7, million workdays were lost due to industrial action in the first half of 21 compared with 1, million lost in the same period last year and,2 million lost in the whole of 213. These labour market trends are not conducive to higher levels of confidence, investment and employment in the medium to longer term. Consumer financial vulnerability, as measured by the Bureau of Market Research (BMR), remained a concern up to the second quarter of 21. At an overall index reading of,2 in the second quarter, consumers were financially mildly exposed, which was only a fraction above the level of being very exposed. An index reading of -,9 in the Consumer Financial Vulnerability Index (CFVI) and its sub-indices indicates that consumers are financially mildly exposed, with an index reading of -9,9 indicating that consumers are financially very exposed. The sub-components of the CFVI were measured as follows in the second quarter of 21: Income vulnerability: At 7,7 index points, consumers were very exposed Expenditure vulnerability: At, index points, consumers were mildly exposed Savings vulnerability: At 1,7 index points, consumers were mildly exposed Debt service vulnerability: At,9 index points, consumers were very exposed According to the Bureau for Economic Research (BER), consumer confidence was at a level of -1 index points in the third quarter of 21, with an average of -1 index points in the first three quarters of the year. These index readings are well below the past 2-year average of +. Consumer confidence is measured by expectations regarding the outlook for the domestic economy, household finances and durable consumption expenditure. Consumer confidence remains an important factor with regard to the demand for credit, which is crucial for household consumption expenditure, especially the durable component thereof. Property sector overview In the second quarter of 21, there were million residential properties in South Africa with a total value of R,2 trillion, of which 2,1 million with a total value of R2,2 trillion were bonded and 3,9 million with a total value of R2 trillion were non-bonded. These statistics with regard to the residential property stock in the country are supplied by Lightstone (see relevant table at the back of the report). The General Household Survey 213, published by Statistics South Africa in June this year, provided some insight into housing conditions in the country in 213: 77,7 of a total of 1,7 million households were living in formal housing. Formal housing refers to structures built according to approved architectural plans, i.e. houses on separate stands, flats, apartments, townhouses and rooms and flats in backyards. 13, of households were living in informal housing. Informal housing refers to makeshift structures not erected according to approved architectural plans, e.g. shacks in informal settlements and backyards.,9 of households living in formal housing, fully owned their properties, with 11, that partially owned their properties (financed by and not fully paid off to financial institutions) and 21, renting the properties they were living in. 1,3 of households were living in RDP or statesubsidised housing. 13, of households had at least one member on a waiting list for state-subsidised housing. 13,3 of households were receiving a housing subsidy from the state. Residentail rental payment behaviour was relatively stable in the second quarter of 21, based on research by Tenant Profile Network (TPN) Credit Bureau. A large percentage of residential tenants remained in good standing with regard to rental payments in the second quarter, with 72 that paid on time (up from 9 in the first quarter), 9 that paid late, that paid within the grace period, 9 that made partial payments and that did not pay at all. With interest rates rising during the course of the year, there has been a noticeable deterioration in rental payment behaviour in especially the upper rental brackets, as tenants in these categories are more credit-active and thus more exposed to the effect of interest rate hikes. The variable mortgage interest rate is currently 9,2 per annum, after interest rates were hiked by basis points in January and a further 2 basis points in July this year, which caused mortgage rapayments to rise. The impact of changes in the mortgage interest rate is reflected in the relevant tables at the back of the report, presenting monthly mortgage repayments for various loan amounts at various interest rates, as well as mortgage loan amounts based on various fixed monthly repayments at various interest rates. These calculations are based on a 2-year repayment term. Residential building activity remained largely under pressure in the first half of 21, in line with trends since 2. The planning phase of new housing, as reflected by the number of building plans approved by local government institutions for houses, flats and townhouses, showed relatively Home Loans

5 strong growth of 13, y/y to a level of 3 1 units in the first eight months of 21 from units in the corresponding period last year. However, the construction phase of new housing, i.e. the number of housing units reported as completed, contracted by 1,2 y/y to a total of 23 units in the period from January to August this year compared with 27 2 new housing units built in the same period last year. The improvement in levels of activity in the planning phase is expected to become evident in a higher level of construction activity in the short to medium term. In both the planning and construction phases more than 73 of the level of building activity this year occurred in the segments of smaller sized houses and higher-density flats and townhouses, which has become a structural feature of the supply of new housing over the past twenty years, driven by factors such as urbanisation, land scarcity, building costs, housing affordability, property running costs (property rates and taxes, levies, electricity, etc.) and changing lifestyles. Building confidence, based on the BER s building confidence index, rebounded somewhat to index points in the third quarter of 21 from a level of 1 index points in the second quarter. The slight rise in building confidence was largely due to improved conditions regarding residential building activity, especially in terms of the planning phase, which showed double-digit year-on-year growth in the first eight months of the year. Levels of confidence with regard to the non-residential sector remained flat. The building confidence index measures prevailing business conditions in the building industry sub-sectors of architects, quantity surveyors, main building contractors, sub-contractors, manufacturers of building materials and retailers of building materials and hardware. The subdued performance of the residential mortgage market continued well into 21 on the back of trends in the economy, household finances, consumer credit-risk profiles, banks risk appetite and lending criteria, consumer confidence and general conditions in the residential property market. As a result, the year-on-year growth in the value of outstanding household mortgage balances has remained low at between 2 and 3 since early 213. Outstanding mortgage balances are the net result of property transactions, mortgage finance paid out, capital repayments on mortgage loans as well as loans fully paid up. According to information published by Old Mutual in the latest edition of the Savings and Investment Monitor, home loan repayment patterns showed some recent shifts against the background of changed conditions regarding the economy and the financial position of households: 3 of homeowners paid the minimum only on mortgage loans on primary residences by mid-21, up from in mid of homeowners paid extra money monthly into their mortgage loans in mid-21, down from 31 in mid-213. of homeowners paid extra lump sums into their mortgage loans in mid-21, down from in mid Based on Absa s calculations, nominal year-on-year house price growth in the middle segment of the market remained resilient in the first three quarters of 21, increasing somewhat in the third quarter from the second quarter, despite challenging economic, consumer sector and property market conditions. However, month-onmonth house price growth has been on a downward trend since January, with early indications that this is starting to impact year-on-year price growth. All categories of housing analysed posted nominal price growth of above the average inflation rate in the third quarter of the year compared with a year ago, while price growth was also evident on a quarterly basis (see tables and section below on house price trends). House prices The third quarter of 21 saw nominal year-on-year house price growth in the middle segment of the market (homes of m² m² and priced up to R million in 21) being marginally higher compared with the second quarter. In the category of affordable housing nominal price growth accelerated further in the third quarter, with price growth in the luxury segment in double-digits. Real house price growth was affected by consumer price inflation, which remained above the level in the third quarter. House prices are continuously being driven by property market conditions, which were affected by a combination of macroeconomic developments, the state of household finances and the level of consumer confidence. The nominal price of a property refers to the price at which it was valued or transacted on the open market, i.e. market price, selling or purchase price and is reflected in a valuation, an offer to purchase, an application for mortgage finance and the transfer documentation at registration. The real price of a property is the nominal price adjusted for the effect of inflation, and is calculated to determine if the value of a property has increased at a rate above or below the inflation rate. In addition to the nominal price, real property price trends and growth are important from a property investment point of view. The residential property price trends presented in this report are based on the value of properties for which Absa received and approved applications for mortgage finance. As a result, price movements may reflect changed market strategies and lending criteria implemented by the bank, impacting differently on the various segments of housing analysed. Real price calculations are based on nominal prices deflated by the headline consumer price index. All price data series are seasonally adjusted and smoothed in an attempt to exclude the distorting effect of seasonal factors and outliers, which may have the effect of recent price data and growth rates differing from previously published figures. Affordable housing Nominal year-on-year growth in the average price of affordable housing (homes of m² 79m² and priced up Home Loans

6 to R in 21) accelerated further to 7, in the third quarter of 21 from,7 and 3, in the second and first quarters respectively. The average price of an affordable home came to R37 in the third quarter. Real price inflation of 1,3 y/y was recorded in the third quarter, up from,2 y/y in the second quarter and some real price deflation of 2,2 y/y in the first quarter of the year. Middle-segment housing The average nominal price of a home in the middle segment of the market (homes of m² m² and priced at R million or less in 21) increased by 9, y/y to a level of almost R1 27 in the third quarter of 21 (9,3 y/y in the second quarter and,7 in the first quarter). Real price inflation in this category of housing came to 3,2 y/y in the third quarter of the year, up from 2, y/y in the second quarter. The following price changes occurred in the three middlesegment categories in the third quarter of 21: Small houses (m² 1m²): 7, y/y nominal and 1,1 y/y real Medium-sized houses (11m² 22m²): 7,7 y/y nominal and 1,3 y/y real Large houses (221m² m²):, y/y nominal and,3 y/y real Luxury housing The third quarter of 21 saw the average price of luxury housing (homes priced at between R million and R1, million in 21) rising strongly by a nominal,9 y/y to a level of just below R,7 million, after prices had risen by, y/y in the second quarter. In real terms, the average price in this category of housing was up by,3 y/y in the third quarter after rising by 1,9 y/y in the second quarter. As the sample size of this category of housing is relatively small, a number of transactions of a higher value compared with the previous quarter and a year ago, could have contributed to the strong price growth in the third quarter. Regional house prices At a provincial and metropolitan level, house prices continued to perform relatively well in most regions in nominal terms, with some real deflation evident in certain areas in the third quarter of 21. However, on a quarterly basis nominal price deflation occurred in five provinces in the third quarter, while there was also some price deflation in some metropolitan areas compared with the second quarter of the year. This might be an indication of the start of some subdued price growth over a wide front in the not-to-distant future, as month-on-month price growth has been trending downwards since early this year, which is expected to be reflected in year-on-year price growth at some stage in the near future. Along the country s coast, year-on-year house price growth was markedly lower than in the country as a whole, although quarter-on-quarter price growth proved to be relatively strong, with the exception of only the KwaZulu-Natal coast that experienced price deflation. House prices have been under pressure for some time in coastal areas, which have a relatively large focus in terms of investment and leisure properties. These conditions in coastal areas may continue over the short to medium term against the background of financial strain experienced by the household sector in general. The performance of the residential property market at geographical level is affected by national economic trends in general. However, the regional property markets may react differently to macroeconomic developments as a result of additional area-specific factors, such as location, physical infrastructure and the level and extent of economic development and growth. These factors may affect property demand and supply conditions, market activity, buying patterns, transaction volumes and price levels and growth. New and existing housing The average price of a new house showed some price deflation of,7 y/y in the third quarter of 21 after accelerating price growth up to the third quarter of 213. However, growth in the average price of new homes has been on a downward trend since the fourth quarter of last year. This development could be the result of somewhat cheaper new housing included in the sample against the background of continued above-inflation increases in building costs (see below) and households experiencing increased financial strain over the past year, such as declining real income growth, rising inflation and higher interest rates. The average price of a new home came to about R1 7 in the third quarter of the year. In real terms the average price of a new house dropped by, y/y in the third quarter. The average price of an existing house was up by a nominal, y/y to a level of around R1 21 in the third quarter of 21, which resulted in real year-onyear price growth of in the quarter. As a result, it was around R27, or 29,, cheaper to have bought an existing house than to have had a new one built in the third quarter of the year. Building costs The cost of having a new house built increased by y/y in the third quarter of 21, slightly lower than the increase of, y/y in the second quarter, but still above the average consumer price inflation rate of,3 y/y in the third quarter. Despite the continued upward trend in building costs, the growth in the average price of a new house has been slowing down into a state of deflation (see above price trends with regard to new homes). Factors impacting building costs, and eventually the price of new housing, include building material costs; equipment costs; transport costs; labour costs; developer and contractor profit margins; and the cost of developing land for residential purposes, which is impacted by aspects such as finance costs, land values, the cost of rezoning, the cost of preparing land for construction and holding costs in general. Home Loans

7 Land values The value of vacant residential stands in the middle and luxury segments of the housing market for which Absa received applications and approved mortgage finance, increased by a nominal,1 y/y to an average of about R27 in the third quarter of 21, after having risen by y/y in the preceding quarter. In real terms residential land values were up by 3, y/y in the third quarter of the year, after declining by a real 1, y/y in the second quarter. The average price of land for new middle-segment and luxury housing increased to 27, of the total value of a new residential property in these categories in the third quarter of 21 from a recent low of 2,3 in the fourth quarter of last year. Residential land values will continue to reflect the allimportant factor of location, as well as the availability of suitable land for development, the availability of municipal services such as electricity, water, sewerage and refuse removal, the availability and condition of transport infrastructure and the proximity to places of work, schools, shopping centres, medical facilities, etc. Affordability of housing The affordability of housing remained on a gradual deteriorating trend up to the second quarter of 21, as reflected by the ratios of house prices and mortgage repayments to household disposable income (see graph on the affordability of housing). This was the net result of nominal house price growth of 9,3 y/y and nominal disposable income growth of 7, y/y in the quarter, while the mortgage interest rate remaind stable at 9 per annum in the second quarter after being hiked in the first quarter. Apart from house prices and the mortgage interest rate, households ability to afford housing is also affected by factors such as employment, income, savings, living costs, debt levels, credit-risk profiles (as reflected by the state of consumer credit records), the National Credit Act and banks risk appetite and lending criteria in the case of mortgage loan applications for buying property. A downward/upward trend in the abovementioned two housing affordability ratios implies that house prices and mortgage repayments are rising at a slower/faster pace than household disposable income. The result is that housing is in effect becoming more/less affordable. Outlook The global economy The IMF s forecast is for the world economy to grow by a real 3,7 in the second half of 21, with growth of 3,3 expected for the full year, rising to 3, in 21. Advanced, emerging and developing economies are to gradually recover further over the forecast period. However, the IMF remains mindful of some downside risks to the outlook for the world economy, which include geopolitical risks, financial market corrections (which have to some extent already occurred recently), the eventual normalisation of monetary policy in the US, deflation or continued low inflation in some regions, continued low levels of economic growth over a wide front and lower than expected growth in China. Growth in advanced economies are forecast to increase from 1, in 213 to 1, in 21 and 2,3 in 21. The US is forecast to grow by 2,2 in 21, rising to 3,1 in 21, which may hold implications for inflation and interest rates. The Eurozone, however, is expected to show growth of only, in 21, increasing gradually to 1,3 in 21, with monetary policy set to remain very much accommodative for an extended period to stimulate economic activity and prevent deflation. The UK economy is forecast to grow by 3,2 in 21, while growth in 21 is expected to be slightly lower at 2,7. Japanese economic growth is expected to remain sluggish at,9 and, in 21 and 21 respectively. In emerging market and developing economies growth is forecast at, in 21 and in 21, with growth in China to slow down from 7,7 in 213 to 7, in 21 and 7,1 in 21, despite some stimulatory measures imposed by the authorities. Growth in sub-saharan Africa is expected to remain robust at,1 in 21 and, in 21, but growth prospects are largely overshadowed by the situation in Guinea, Liberia and Sierra Leone where the Ebola outbreak is taking a heavy toll. In addition to this, the performance of the global economy, including China, and trends in commodity prices, remain important to most countries in sub-saharan Africa, while the region also remains vulnerable to severe weather conditions, which may have a major impact on food production and food price inflation. The IMF forecasts consumer price inflation in advanced economies to remain relatively low at 1, and 1, in 21 and 21 respectively, with inflation of around 2 expected in the US this year and next year, which may prompt the Federal Reserve to hike interest rates at some stage in the next twelve months. However, inflation expectations in the US have dropped in recent months, which may have the implication that interest rates may be on hold for longer than anticipated. In the Eurozone, fears of deflation persist, with interest rates to remain low for an extended period. In emerging market and developing economies consumer price inflation is projected to be around, in 21 and 21. The South African economy Against the background of severe strike action in the South African economy in the first seven months of the year, which led to huge production losses, growth forecasts were downscaled to around 1, for 21. Economic growth is expected to rebound in 21, but to remain below the 3 level in real terms. The performance of exports will largely be a result of global economic trends and movements in the rand exchange rate, which is expected to depreciate further against some major international currencies such as the US dollar. Growth in real domestic demand is set to be below 1 in 21, which will be a reflection of relatively low levels of confidence and financial strain experienced Home Loans 7

8 by consumers and the business sector on the back of inflationary pressures and rising interest rates. Headline consumer price inflation is forecast to remain above the level until year-end/early 21 before tapering off gradually. The main risks to the inflation outlook are the exchange rate, food prices, transport costs, property running costs and wage hikes. The $/R exchange rate is forecast to depreciate by 11,3 in 21 and,9 in 21, which will keep inflation under upward pressure. Domestic interest rates are forecast to rise through 21 on the back of current trends in and prospects for the global and local economy, financial conditions and sentiment, and inflationary pressures. Prime lending and variable mortgage interest rates are forecast to end the year at a level of 9,2 per annum, rising to by the end of 21. There are, however, a number of key risks that may affect the outlook for the South African economy over the short to medium term, which include the following: Continued, subdued world economic growth, affecting the country s export performance. Eventual US interest rate hikes on the back of a faster growing economy and rising inflation. Higher US interest rates will narrow interest rate differentials, impacting capital flows, exchange rates, inflation and interest rates in emerging markets, including South Africa. A credit rating downgrade to speculative level, which may lead to a weaker rand exchange rate, rising inflation, a higher country risk premium and thus a higher cost of funding, higher interest rates on credit extended to households and the business sector, subdued domestic demand and investment conditions, low economic growth and a stagnant or even lower level of employment. A speculative credit rating may also negatively impact capital flows, as some global portfolio managers mandates prevent them from investing in countries having a credit rating below investment grade. Continued, tight labour market conditions and tension, reflected by strike action, a loss of production and export earnings, low growth in productivity, rising unit labour costs on the back of above-inflation wage hikes, subdued employment growth and unemployment remaining high. Continued or increased financial strain on consumers and businesses, which may further dampen demand, production, investment, employment and confidence in the economy. The household sector The aspects of economic growth, employment, income, debt, inflation and interest rates will remain important to the state of and trends in household finances, with the following expectations regarding some major household sector-related factors in 21-1: Growth in employment is expected to remain low. Growth in real household disposable income is projected at below 2 in 21 and 21, impacted by factors such as economic growth, employment and inflation. Household consumption expenditure is forecast to grow by less than 2 in 21 and 21, and to continue its close correlation with disposable income growth as a result of low savings and inflationary pressures. The ratio of household consumption expenditure to GDP is forecast at around for both 21 and 21, emphasising the fact that the consumer sector remains a major driver of economic activity in general. An expected further upward trend in lending rates will hamper the affordability and accessibility of and demand for credit, with the household debt-to-income ratio to further subside towards the end of 21 and in 21 as a result. The cost of servicing household debt as a percentage of disposable income will increase further on the back of rising lending rates. Consumers credit-risk profiles will remain a key factor in the accessibility of and growth in credit, which will be reflected in consumption expenditure. The property market The residential property market will continue to reflect trends in economic growth, employment and household income, property running costs and inflation in general, interest rates, consumers credit-risk profiles, banks risk appetite and lending criteria and consumer confidence. These factors will drive the affordability of housing and mortgage finance, which will be evident in trends in property demand and supply, property prices, market activity, buying patterns, transaction volumes, the demand for mortgage finance and home loan repayment patterns. Against the background of trends in and prospects for the economy and household finances, as well as house price growth in the first three quarters of the year, single-digit nominal price growth is set to continue for the remainder of 21 and in 21. Real house price growth will be the result of nominal price trends and inflation, with some real price inflation projected for this year and next year. Growth in outstanding household mortgage balances, which remained low at just above 2 y/y beyond mid-21, is expected to continue to be in low single-digits up to year-end and in 21 against the background of the state of household finances and consumer confidence. Residential building activity will continue to be driven by economic trends, household finances and consumer and building confidence. These factors will impact the demand for and supply of new housing, along with trends in the secondary market for homes, changing lifestyles, the availability of serviced development land and building costs. Building activity for new housing is expected to remain relatively subdued over the next to 1 months, very much along the trends of when the number of plans approved per annum came to,1 of the annual average of units planned in 2-27 and the number of new housing units constructed per annum came to 7, of the annual average of units built in Home Loans

9 Graphs change Real gross domestic product 2-2 q/q change - y/y change - - Source: SARB Source: SARB, Stats SA Targeted inflation and interest rates CPIX/CPI (Left) Prime rate (Right) Repo rate (Right) 1 1 q/q change Household income and consumpon. Net household saving ( of disposable income) Real consumption growth Real disposable income growth Source: SARB -2. Source: SARB y/y change Source: SARB Household credit and mortgage balances Total credit balances Mortgage balances Source: SARB Household debt and debt servicing (Debt and debt servicing as of income) Debt servicing ratio (left) Prime rate (left) Debt ratio (right) Source: NCR Consumer credit-risk profiles ( of total credit-active consumers) with impaired record (left) in good standing (right) Source: BER Consumer confidence index ( = neutrality) Home Loans 9

10 y/y change Affordable house price growth (m²-79m², R ) Nominal Real Middle-segment house price growth (m²-m², R million) y/y change 2 Nominal Real y/y change Luxury house price growth (>R million-r1, million) Nominal Real y/y change House price growth: coastal regions (m 2-7m 2, R1,m) Nominal Real (Nominal, m²-m², R million) Rand 19 Existing (left) 1 New (left) 3 17 difference (right) Average price of new and existing houses y/y change 2 Building cost of new houses (m²-m², R million) Growth in residential land values y/y change (New housing) 3 2 Nominal 2 Real Index 2= Affordability of housing Repayment/HDI (left) House prices/hdi (left) Mortgage interest rate (right) Home Loans

11 Statistics Q1 213 Q2 213 Q3 213 Q 213 Q1 21 Q2 21 share 2 Number of properties Total number of properties Bonded Non-bonded Freehold properties (excluding estate properties) Bonded Non-bonded Sectional title properties (excluding estate properties) Bonded Non-bonded Estate properties Bonded Non-bonded Property values (R billion) Total value of properties Bonded Non-bonded Freehold properties (excluding estate properties) Bonded Non-bonded Sectional title properties (excluding estate properties) Bonded Non-bonded Estate properties Bonded Non-bonded Housing and vacant land, excluding housing on agricultural smallholdings and farms. 2 Latest available quarter. Percentage share may not add up due to rounding. 3 Freehold properties, sectional title properties and vacant land. Residential property stock 1 Historical data may be revised due to the inclusion of lagged information and the re-estimation of property values. Source: Lightstone Monthly mortgage repayment Rand, calculated over a period of 2 years Mortgage Repayment at a mortgage rate of amount Mortgage amount at fixed monthly repayment Rand, calcutaled over a period of 2 years Mortgage Mortgage amount at a mortgage rate of repayment Home Loans 11